2. What is a budget?
• A Plan
• A Limit
• A Schedule
• A Reality Check
• An Allocation
3. Budget – a definition
“A planned expression of money”
Wright.D 1994 “A practical foundation in costing” Routledge
For a defined activity
Shows;
• Income & Expenditure
• Total estimated costs
• Defined period of time
4. Another definition
A budget process is a system of rules
governing the decision-making that
leads to a budget, from its formulation,
through its legislative approval, to its
execution.
Karl-Martin, Ehrhart, Roy Gardner, Jürgen von Hagen, and Claudia Keser
Budget Processes: Theory and Experimental Evidence, November 2000
5. More definitions
Budget = Quantitative expression of a plan
Budgets involve – Planning
&
Control
Forecasting
&
Planning
Control
&
Evaluation
8. Why use a budget?
• Stay within a limit
• Control
• Forecasting
• Delegate
• Prioritise Wants, Organise Needs,
• Within the realm of what we Can
9. Types of budgeting
There are three common budgeting methods:
• Top-down Budgeting
• Bottom-up Budgeting
• Iterative Budgeting
10. Top Down Budgeting
Top-Down Budgeting is the term given
to a budgeting process based on
estimating the cost of higher level tasks
first and using these estimates to
constrain the estimates for lower level
tasks
11. Top Down Budgeting
A crucial factor for successfully
implementing this method for estimating
budgets is the experience and
judgement of those involved in
producing the overall budget estimate.
12. Top Down Budgeting
• Organisations need the ability to allow:
• Financial Managers to establish centralised
budgets to control organisation spending.
• Project Managers to establish projects
budgets that consume the centralised
organisation budget and control project
spending.
13. • Takes less time
• Promotes upper-level commitment
• Involves no multilevel participation
• Lower management better understands
what upper management expects
• Presented down the ladder
Top Down Budgeting
14. Top Down Budgeting
• Disadvantages
• Translating long-range budgets into
short-range budgets.
• Problems scheduling projects in a "sub-
optimal way" to meet the strategic goals
Result of top management's limited
knowledge of specifics of project tasks
and activities
15. Top Down Budgeting
• Disadvantages
• Competition for funds among lower-level
managers, try to secure adequate funding for
their operations.
• May cause unhealthy competition.
This process is a zero sum game--one
person's or area's gain is another's loss.
• Subordinate managers often feel that they
have insufficient budget allocations to
achieve the objectives
16. Top Down Budgeting
• Advantages
• Aggregate budget is quite accurate, even
though some individual activities subject to
large error
• Budgets are stable as a percent of total
allocation and the statistical distribution of
the budget is also stable leading to high
predictability
• Small costly tasks don’t need to be identified
early in this process - factored into overall
estimate
17. Bottom Up Budgeting
Sometimes called Zero Based Budgeting
• Bottom-up budgeting begins with identifying
all the constituent tasks that are involved in
implementing a project and working out the
resources and funding required by each
18. Bottom Up Budgeting
• Provides the opportunity to create
organisation level budgets by rolling up
project budgets
• Create centralised project level budgets from
their sub-project budgets (WBS)
19. Bottom Up Budgeting
• This method of budgeting provides the
following benefits:
• Project Managers have the flexibility to
define their project budgets
independently
• Financial Managers have the ability to
centrally review the total project budget/s
20. Bottom up budgeting
• Takes more timeTakes more time
• Involves cross-section of the organisationInvolves cross-section of the organisation
• Presented up the ladderPresented up the ladder
• Seeks participation at all levelsSeeks participation at all levels
• Encourages commitment to the planEncourages commitment to the plan
21. Bottom Up Budgeting
• Disadvantage
• Top management has limited influence
over the budgeting process,
• Individual tend to overstate their
resource needs because they suspect
that higher management will probably
cut all budgets by the same percentage
22. Bottom Up Budgeting
• Disadvantage
• More persuasive managers sometimes
get a disproportionate share of
resources
• A significant portion of budget building
is in the hands of the junior personnel in
the organisation
• Sometimes critical activities are missed
and left unbudgeted
23. Bottom Up Budgeting
• Advantage
• Is in the accuracy of the budgets for
individual tasks
• Clear flow of information
• Use of detailed data available at project
management level as basic source of cost,
schedule, and resource requirement
information.
• Participation in the process leads to
ownership and acceptance
24. Iterative Budgeting
Iterative – to repeat or do again
A combination of top-down and bottom-up
budget building
Higher project level estimated (top down)
Lower level costed (bottom up)
The two costs negotiated and reconciled
25. Iterative Budgeting
• Disadvantage
• Is in the relative inefficiency and time
consuming nature of the negotiations
over the budgets.
• Process may not work well when
communication channels are either
informal or blocked between lower-level
managers and senior management
26. Iterative Budgeting
• Advantage
• It promotes employee involvement and
stimulates a high degree of information
flow between those involved in the
project at different levels
• Both senior management and lower
level managers closer to the actual
process participate in the budgeting
process
27. Top Down vs. Bottom Up
• Top-down Bottom-up
• Problems of Bottom-up Budgeting
• Difficult to control aggregate spending
• Allocations may not be optimal
• Hard to keep multi-year perspective
28. Top Down & Bottom Up Compared
• Bottom-up • Top-down
- Annual - Multi-year
- Time consuming - Delegated authority
- Ownership of proposals is - Creates joint ownership of
specific proposals
- Reactive - Proactive
29. Activity Orientated Budget
• The traditional budget is activity based
• Individual expenses classified and
assigned to basic budget lines e.g.
phone, materials, personnel, clerical,
utilities, direct labour, etc
• Diffused control so widely that it was
frequently non-existent
30. Task Orientated Budget
• Also known as Program Budgeting
• Aggregates income and expenditures
across programs (projects)
• The project has its own budget
31. Task Orientated Budget
• Pure project organisation, the budgets
of all projects are aggregated to the
highest organisational level
• Functional organisation
income/expense for each project are
shown
32. Planning Programming
Budgeting System (PPBS)
• The system focuses on funding those
projects that will bring the greatest
progress toward organisational goals for
the least cost
• Basically a Program and Planning
Budgeting System
33. Planning Programming
Budgeting System (PPBS)
• Identification of goals and objectives for
each major area of activity - planning
• Analysis of the programs proposed to
obtain organizational objectives -
programming
• Estimation of the total costs for each
project, including indirect costs. Time
phasing of costs is detailed.
34. Planning Programming
Budgeting System (PPBS)
• Final analysis of alternative projects in
terms of costs, expected costs,
expected benefits, and expected project
lives.
• Cost/benefit analyses are performed for
each program so programs can be
compared with each other and a
portfolio of projects can be selected for
funding
35. Budget Planning linked to
Project Activity
• Only way a detailed budget can be
produced
• Can monitor budget usage against
project activity
• Can be done when the project schedule
has been determined
38. Budgetary Control
The Projects Budgetary Controls
feature includes the following:
• Flexible Setup of Controls
• Defines Control Amounts
• Defines Control Levels
• Funds Check - Performs the available
funds verifications.
• Maintenance of Available Balances -
Maintains the available balance for each
project budget line.
39. Budgetary Controls
• Actual Transactions;
are recorded project costs.
Examples include labour, expense report,
usage and miscellaneous costs.
• Commitment Transactions;
are anticipated project costs.
Examples include purchase requisitions and
purchase orders or contract commitments.
40. Features of an effective budget
1. Accurate forecasting
2. Based on organisational goals
3. Information is timely and accurate
4. Formed with multilevel input
5. Regular reviews are built-in
41. Problems with budgeting
• The process is too long
• There is a lot of game playing
• Business decisions change but the
budget does not
• People in charge of budget are held
accountable in areas where they have
no responsibility
• Applying an arbitrary percentage to
prior period actual
42. Analysing Variance
• Budget deviation analysis (variance
analysis) regularly compares what you
expected or planned to earn and spend
with what you actually spent and
earned.
• Variation analysis can help greatly
when detecting how well you’re tracking
your plans, how much to accurately
budget in the future, where there might
be upcoming problems in spending.
43. Example of a variance report
Date: June 30, 2006
Account: Product Development MONTH TO DATE
ACCOUNT REF. ACTUAL BUDGET VARIANCE %
SALARIES 5025 £48,000 £43,750 - £4,375 - 10
TRAVEL 6442 £1,500 £1,200 - £300 - 25
SUPPLIES 5320 £500 £700 £200 28.5
44. Benefits to checking variance
• Understand the reason for the
differences
• Prepare a more accurate budget in the
future
• Evaluate budget goals
• Isolate problems
• Identify weak areas
• Motivate managers
• Communicate with all levels
• Forecast
45. Response to budget warnings
1. Freeze spending
2. Freeze activity
3. Put off “unnecessary” projects activity
4. Re-schedule/cost your project
5. Downsize your project